Finch Company produces a product that has a variable cost of $27 per unit and a
ID: 2331803 • Letter: F
Question
Finch Company produces a product that has a variable cost of $27 per unit and a sales price of $62 per unit. The company’s annual fixed costs total $780,000. It had net income of $340,000 in the previous year. In an effort to increase the company’s market share, management is considering lowering the selling price to $52 per unit.
Required
If Finch desires to maintain net income of $340,000 how many additional units must it sell to justify the price decline?
Assume that in addition to lowering its selling price to $52, Finch also desires to increase its net income by $80,000. Determine the number of units the company must sell to earn the desired income.
If Finch desires to maintain net income of $340,000 how many additional units must it sell to justify the price decline?
Assume that in addition to lowering its selling price to $52, Finch also desires to increase its net income by $80,000. Determine the number of units the company must sell to earn the desired income.
Required
Explanation / Answer
Variable cost per unit = 27
Sales price per unit = 62
Contribution margin per unit = Selling price per unit - Variable cost per unit
= 62 - 27
= 35
Fixed costs = 780,000
Net Income = 340,000
Number of units sold = (Net Income + Fixed costs) / Contribution margin per unit
= (340,000 + 780,000) / 35
= 32,000
Required
Variable cost per unit = 27
Sales price per unit = 52
Contribution margin per unit = Selling price per unit - Variable cost per unit
= 52 - 27
= 25
Fixed costs = 780,000
Desired net Income = 340,000
Number of units to be sold = (Desired net Income + Fixed costs) / Contribution margin per unit
= (340,000 + 780,000) / 25
= 44,800
Additional required units = 44,800 - 32,000 = 12,800
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Variable cost per unit = 27
Sales price per unit = 52
Contribution margin per unit = Selling price per unit - Variable cost per unit
= 52 - 27
= 25
Fixed costs = 780,000
Desired net Income = 340,000 + 80,000 = 420,000
Number of units to be sold = (Desired net Income + Fixed costs) / Contribution margin per unit
= (420,000 + 780,000) / 25
= 48,000
Number of units sold = 48,000
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